ELECTRONIC BLOCK-TRADING FIRM Liquidnet Holdings has been the rebellious teenager of the stock-trading world since it was launched nearly seven years ago. Founder Seth Merrin and his team of true believers at the convention-busting start-up have insisted on doing things their way, creating the first buy-side-only alternative trading system and publicly railing against what they believed were the outmoded and conflicted business models of established Wall Street exchanges and brokerages.
So far their nonconformity has paid off. Today the firm handles some 74 million shares daily in the U.S. and boasts 440 members, mostly mutual funds and other asset managers that use its anonymous platform to negotiate block transactions averaging 56,000 shares each, compared with about 300 shares per trade in the wider markets. In Europe, Liquidnet is the sixth-biggest brokerage on the London Stock Exchange, executing 30 million shares daily. Last month it launched in Asia, and now it does business in 28 markets worldwide.
Merrin, the firm’s CEO, has also worked to overcome Liquidnet’s limitations. His two biggest recent moves — launching H2O, an offshoot of its main trading system, last year and, in March, acquiring the technologically savvy brokerage Miletus Trading — have taken Liquidnet beyond its origins as a novel block-trading network and made it a diverse brokerage that can capture more of its clients’ business. H2O involves partnerships with 19 securities firms; orders generated by their computerized systems and bound for the New York Stock Exchange, Nasdaq and other destinations first pass through Liquidnet’s buy-side-only market, where they have the opportunity to be matched at superior prices. With Miletus, now called Liquidnet Quantitative Trading Services, the firm offers algorithms that institutions can use to work big orders in the public markets while remaining exposed to potential matches in both Liquidnet’s original crossing network and in H2O. Previously, clients had to leave the block platform to work an order in bits and pieces, forgoing the chance to get the entire transaction done in one shot.
“We’ve always been good at executing big blocks,” Merrin tells Institutional Investor. “But if you had 3,000 shares left over, we sucked. We used to force our members to go away from Liquidnet. Now we give them the ability to get orders started and leave them in Liquidnet all day. We’re evolving from being a one-trick pony to being able to offer our customers any kind of execution.”
Competition has become far more heated since Liquidnet traded its first shares in April 2001. There are now some 40 alternative networks for stock trading, up from a handful a few years ago. Many are run by big firms, like Citigroup, Credit Suisse and Goldman, Sachs & Co., that have streams of captive order flow. Last month the NYSE announced a partnership with Block Interest Discovery Service, a Liquidnet rival operated by a consortium of big Wall Street firms, to jointly operate an automated block facility.
Still, Merrin believes institutions will remain loyal to Liquidnet because of its commitment to serving their interests first. “We’re not going to be the only survivors here,” he says. “But I think that our buy-side-only model will retain a lot of value regardless of what the exchanges and the sell-side firms do.”
The next step for Merrin might just be the hardest. The firm — whose last round of private financing in February 2005 valued it at nearly $2 billion, at the time higher than the NYSE — is gearing up for an initial public offering, which could occur in late 2008, he says. The former Oppenheimer & Co. risk arbitrageur has hinted for years that he has little desire to run a public company. He’s got plenty of money from having sold two previous financial technology start-ups, VIE Systems and Merrin Financial. So does that mean he’ll bow out after Liquidnet’s shares start trading in the public markets? Don’t bet on it. Merrin sounds willing to change his thinking about running a public company.
“For me, I think it means growing up,” he says. “I’m having too much fun now to just be a chairman or step back from the day-to-day.”
